Sycip Gorres Velayo and Co.

February 20, 2018 ITAD BIR RULING NO. 015-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-France tax treaty, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on July 15, 2016 requesting confirmation that service fees paid by Manila Water Company, Inc. (" Manila Water ") to Egis Eau S.A. (" Egis ") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-France tax treaty "). 1 IDaEHC FACTS Egis is a foreign corporation organized and existing under the laws of France and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Direction Generale des Finances Publiques of France. Its primary object is to operate in the sectors of water (fluvial, urban, coastal and maritime, rural and industrial hydraulics), energy, the environment (notably terrestrial, aquatic and marine), and the climate. Egis is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Manila Water is a domestic corporation which has the concession to provide water and used water services to the eastern side of Metro Manila in the Philippines under a Concession Agreement with the Metropolitan Waterworks and Sewerage System on February 21, 1997. The concession period is until May 2037. Manila Water provides water treatment, water distribution, sewerage and sanitation services to residential, commercial and industrial customers of the cities of Makati, Mandaluyong, Pasig, Pateros, San Juan, Taguig and Marikina in Metro Manila; most parts of Quezon City; portions of Manila; and the whole Province of Rizal including Antipolo City and the municipality of Teresa. 2 On November 16, 2015, Manila Water entered into a Contract for Consultancy Services with Egis and Egis International S.A. Philippine Branch (" Egis International Branch ") (collectively, " the consultants ") for the reference design of the medium-term east source of Tayabasan headworks and water treatment plant (" project "). The project will tap the Tayabasan River in Marikina as a water supply source for customers of Antipolo and Teresa. The project site is in Antipolo. The project will be completed within 240 days. The project cost is P69,090,484.14, with P__________ payable to Egis and P__________ to Egis International Branch . The project requires the following key experts: Project Manager/Team Leader, Dam Design Engineer, Hydrologist, Water Resources Engineer, Process Design Engineer, Geotechnical Engineer, Geodetic Engineer, Contracts Specialist, Civil/Structural Engineer, Electromechanical Engineer, Cost Engineer, Environmental Specialist, and Sociologist. Egis will perform most tasks of the project: review of previous studies; hydrologic assessment; geological assessment; preparation of concept design; and dam operation analysis. On the other, Egis International Branch will conduct survey works and geotechnical investigation, and collect data and reports for the project. However, when performing these works, Egis International Branch shall conduct them within the program definition laid down by Egis . Likewise, Egis shall review and approve all collected data collected and prepared by Egis International Branch . Based on a sworn statement dated June 6, 2017 issued by Manila Water , on July 17, 2017, Manila Water and Egis entered into Variation Order No. 1 to the Contract to extend the field surveys and geotechnical investigations at the dam site, with supplemental time extension to perform the agreed services to Manila Water . Egis designated the following personnel to the project: 1. BBB _________________________________________________ . 2. CCC _________________________________________________ . 3. DDD _________________________________________________ . 4. EEE _________________________________________________ . 5. FFF _________________________________________________. Onsite and offsite services performed by Egis for the project include project directorship; quality control; team coordination; report review; coordination and review of hydrological report, treatment process report, and dam design report; site visits; intermediary and final presentation of project development; definition of geotechnical surveys on site; and interpretation of geological and geotechnical surveys for common facilities. Onsite services by Egis personnel aggregated 107 days. DTCSHA Based on Egis International Branch 's Audited Financial Statements as of December 31, 2016, it is the branch office of Egis International S.A. whose head office in France. Egis International Branch provides consultancy services to foreign assisted projects. Based on a sworn statement dated June 6, 2017 issued by Egis International Branch , it does not have the necessary expertise, personnel, and assets to provide all deliverables of the project without the participation of Egis . Based on a certification dated April 4, 2016 issued by Manila Water , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived in the Philippines by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, income is exempt to the extent required by any treaty obligation on the Philippine government, to wit: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, you invoke paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty, which provide: " Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period of more than six months; i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve months period." Under Article 7, profits derived by an enterprise of a Contracting State in the other Contracting State may be taxed in the other State if the enterprise carries on business in the other State through a permanent establishment situated therein, and the profits are attributable to the permanent establishment. CScTED Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. It includes also the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-months period. Based on the given facts, Egis is deemed to have a permanent establishment by reason that the project carried out in the Philippines by personnel of Egis and personnel of Egis International Branch, taken together , lasted 240 days , or more than six months (180 days) within any twelve-months. Based on the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (July 15, 2014), a permanent establishment exists if there is a place of business for the enterprise, and that place of business is fixed, and there is carrying on of business in that fixed place by persons who, in one way or another, are dependent on the enterprise, to wit: "2. Paragraph 1 gives a general definition of the term 'permanent establishment' which brings out its essential characteristics of a permanent establishment in the sense of the Convention, i.e., a distinct 'situs,' a 'fixed place of business.' The paragraph defines the term 'permanent establishment' as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: the existence of a 'place of business,' i.e., a facility such as premises or, in certain instances, machinery or equipment; this place of business must be 'fixed,' i.e., it must be established at a distinct place with a certain degree of permanence; the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated ." (Page 94) (Emphasis ours) Personnel of Egis International Branch involved in the project, whether working onsite or at Egis International Branch 's premises in the Philippines, are dependent on Egis because most tasks of the project review of previous studies; hydrologic assessment; geological assessment; preparation of concept design; and dam operation analysis including and most importantly, project directorship , are assigned to Egis and not Egis International Branch. While Egis International Branch is also named a consultant to the project and responsible in some aspects of the project, its personnel shall conduct survey works and geotechnical investigation of the project within the program definition laid down by Egis , and all collected data and prepared reports by those personnel shall be reviewed and approved by Egis before submitting to Manila Water . EDCcaS This being the case, where Egis is deemed to have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty, the service fees paid to it by Manila Water as compensation for the reference design of the medium-term east source of Tayabasan headworks and water treatment plant is taxable in the Philippines pursuant to paragraph 1, Article 7 of the treaty. The fees are subject to income tax at the rate of 30% under Section 28 (B) (1) of the Tax Code. Moreover, the service fees are subject to value-added tax (" VAT ") under Section 108 (A) of the Tax Code, to wit: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%). . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 3 Manila Water shall withhold VAT on the service fees at the rate of 12% before remitting them to Egis . Manila Water shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and accompanying proof of payment shall serve as documentary substantiation for Manila Water 's claim of input VAT on the fees; otherwise, if it is not a VAT-registered taxpayer, the passed-on VAT shall form part of Manila Water 's cost of purchased services and treated as asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As amended first by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998 , and then by the Protocol Amending the Agreement between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective February 1, 2013 . 2. http://www.manilawater.com/Pages/OurCompany-BusinessProfile.aspx . 3. Entitled Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) . n Note from the Publisher: Copied verbatim from the official document.